Emerging market equities have witnessed horrendous trading lately ravaged by the economic turmoil in China – the world’s second-largest economy and the largest emerging economy too. Back-to-back blows from China including currency devaluation, lackluster manufacturing data and the failure of the government’s relentless efforts to contain the stock market slide sent shockwaves around the world with emerging markets being among the most vulnerable spots.

This, along with the constant guesswork on the Fed’s lift-off issues, threatened investors about their holdings on this susceptible-but-relatively-high-growth region. Investors ruthlessly dumped emerging market equities in apprehension of an imminent slowdown and a cease in cheap dollar inflows (once the Fed hikes rates). If this was not enough, IMF recently slashed the global growth forecasts for 2015 and 2016, mainly addressing the slowdown in emerging markets hurt by slouching commodities.

The health of emerging markets is worsening, with growth expected to slow in 2015 for the fifth straight year. The two pillars of BRIC region – Brazil and Russia – will likely slip into recession this year and in the next. A protracted commodity market rout eclipsed the growth prospect of these two commodity-rich economies. Other key markets were also not out of the woods.

Capital inflows to emerging markets are likely to turn negative this year for the first time since 1988. The fund outflows ($12.4 billion) in Q3 were the highest since the first quarter of 2014 when the emerging market funds bled $12.7 billion in assets. In September, emerging market ETFs witnessed $1.9 billion of extraction. Though bond funds were also unsteady, equities were hit hard (read: ETFs to Watch as Emerging Market Asset Outflow Doubles).

Though the scenario soothed a lot after a somber U.S. job report for September and China was able to put up some decent factory data for the month, things are yet to go a long way. A lot needs to be seen before investors’ confidence over this troubled-but-important zone is restored.

A compelling valuation after a bloodbath may shower gains on emerging market equities ETFs lately, but we are unsure of how long this optimism will continue.

Several Hedge Funds Are Utterly Bearish 

As per Bloomberg, Fortress Investment Group LLC indicated that emerging markets are approaching a bear market of a scale seen during the Asian financial crisis of 1997. Credit crunch in these regions will continue till March 2017 going by the past economic cycles, according to Fortress.

Several other hedge funds like Forum Asset Management and Ray Dalio’s Bridgewater Associates have also pointed to the lingering pain. According to the Institute of International Finance, investors will haul out about $540 billion from developing countries this year.

While all are not outright bearish on this region as many see lucrative opportunities following a sell-off, it is wise to practice a defensive approach while playing this over-sensitive arena (read: Playing Emerging Markets? Try the New Ex-China ETF).

Dollar-Denominated Bond – iShares JP Morgan USD Emerging Markets Bond ETF (EMB)

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